The annual reports of many publicly listed entities proudly state that people are their greatest assets. It has been said so many times now that it has become something of a cliché. Often these are the same entities that when cost cutting is required, first look to lay off staff, cut wages or reduce their spending on training.

What would the corporate world look like if organizations truly believed that people were their greatest assets? What if accounting standards allowed companies to place a value on their employees based on their experience, knowledge and skills? The more diverse the experience, knowledge and skills the higher the value of the employees, as the company has a greater resource of potential creativity and innovation that it can draw upon. What if people could be classified as an asset and included on the Balance Sheet of a company? Would companies treat their staff differently? Would they be willing to invest more time and money in their employees, in an effort to increase their value to the organization?

The purpose of this hack is to present an alternative way of viewing what should be the heart and soul of every organization, the diversification of its people.

Problem

The increase in flow of people internationally means that most western workforces are more culturally diverse now than at probably any time in history and those that aren’t soon will be. Due to globalisation the western world is no longer a white Anglo-Saxon homogeneous community, if it ever was, but rather a melting pot of different cultures, languages, beliefs and traditions. This diversity means that people are not a homogeneous group, but rather a group of unique individuals. Organisations are challenged by diversity on three levels; an increasingly diverse work force, a multicultural customer base and a global market place.

While the diversity of modern society may be evident on the shop floor of the local supermarket and in the playgrounds of our local schools, the changing face of today’s diverse society is not often reflected in the composition of the senior executive or in the board rooms of most large organisations. But the composition of a company’s executive team should reflect the complexity of its environment.

Diversity can help a team, better understand and interpret the complexity of its environment. It can also have positive influences on team dynamics and strategic decision making. Diverse teams are more effective in solving complex problems that require innovative solutions, this is because diverse teams have differing perspectives and generally have a broader knowledge base.

So how can organizations be encouraged to capture the advantage of diversity?

Solution

While organizations often say that people are their greatest assets, they can also be their greatest liability. This hack proposes that organizations should treat their people as assets and liabilities and record them on the Balance Sheet.

By classifying an employee as an asset, it would then be in the company’s best interest to try to increase the value of the employee. This can be done by the company investing time and money into the employee, through training, mentoring and developing the employee. If the employee feels valued their sense of job satisfaction will increase as they will be given a clear career path and be given growth opportunities. The benefit to the employer is a more committed work force, lower absenteeism, lower staff turnover, better qualified staff all leading to higher productivity.

Conversely those employees that the company classifies as a liability would be exited from the business, as the company would not want to maintain the liability on their Balance Sheet.

But can an employee truly be classified as an “asset” or a “liability”? Accounting standards define an asset as “a resource controlled by the entity…from which future economic benefits will flow”. An employee fits this definition. So what about classifying an employee as a liability? Accounting standards define a liability as “a present obligation of the entity…which is expected to result in an outflow from the entity of resources”. A poor performing employee can cost a company dearly in terms of lost opportunities and costly mistakes, so an employee can also fit this definition.

The classification of an employee as an asset or a liability should be a straight forward exercise. Does the employee add value to the organization? If yes then they are an asset, if no then they must be a liability.

The tricky part is how to value the employee. Studies have shown that diversity is a recognizable source of creativity and innovation that can provide a basis for competitive advantage. Therefore the asset value of a diverse team should be higher than that of a homogeneous team, as diversity can add value and provide a source of sustained competitive advantage.

Practical Impact

The practical impact of classifying employees as assets or liabilities and including them on the Balance Sheet, is that companies would treat their employees as an investment. It would therefore be in their best interest to make the investment grow and to nurture it, rather than treating employees as an expense which needs to be controlled.

Like all investments it is better to have a diversified portfolio rather than having “all your eggs in one basket”. Therefore a diversified workforce would be valued higher than a homogeneous work force.

Diversity brings with it a multitude of experiences that can enhance team innovation through the generation of alternative solutions and innovation. Accordingly, the greater the diversity of senior management, the greater the potential for understanding and problem solving that can enable a company to effectively address the business environment.

First Steps

Just having diversity is not sufficient to produce benefits, it must be managed. In order to realize the benefit of diversity, it is necessary for heterogeneous team members to have an awareness of the attitudinal differences of other members. Diversity needs to be managed in part by informing work group members of cultural differences. Cultural awareness training should therefore be a standard element of an organization’s management of diversity.

In order for an organization to capture the advantage of diversification, studies have shown that there needs to be a spirit of trust and respect for all team members, a genuine participation in decision making and an openness and willingness to accommodate alternative ideas and values.

Credits

Dr Bernie Frey, for encouraging us to use our imagination to challenge the status quo.

To my wife Lily, for your patience and understanding while studying for the MBA.

I agree with you that the trite "people are our greatest asset" is an over used and out of date concept.

I like the idea of the "assets" v "liabilties" rating but would quetion how many businesses actually have any robust and fair way of categorizing staff into those 2 columns.

In 1936 Winston Churchill was considered a liabilty and his public life considered over after his support of King Edward VIII, By1945 he was considered an Asset as Prime Minister of the United Kingdom for the leadership he displayed in WWII,

Does holding an unpopular postion make you a Liability? Does following the company line make you an asset? Does taking a different path, but reaching the correct outcome make you a liabilty or an asset? And who makes that choice, what are going to be the accepted "Standards" for making that determination, one persons thought, 5 people, a questionaire?

It is great to see someone else thinking along these lines. As you say the biggest problem is - or has been - how to value people. However, that is actually something that coulds the issue and the major issue is actually a way to value people consistently and equitably. i.e If I am valued at x I need to know that Joe Blogg's valuation of y has been determined according to exactly the same criteria and that any independent party doing a valuation would arrive at the same values. I have devised a way to do this.

At the same time I have addressed your liability issue, although along very different lines to those you outline. However, I believe that it will create a mechanism that will ensure the organisational headcount tends towards an innate equilibrium that will encourage greater efficiency and instil the peer pressure that ensure the organisation does not carry people who are a liability.

Like Mitch I think you side-trip into diversity clouds the issue completely but please read my hack and see whether it addresses your issues.

Your title agrees with my thinking but your tangent on diversity blurs the concept.

Thinking of people as an asset you have to account for them like other assets. Their skin color, place of birth, religion are merely characteristics.

You need to account for acquisition, installation, maintenance, repurposing, upgrading and replacement costs. Then you have to assess the assets value to the entity and this is the challenging bit to do objectively. All acquired assets either need to fulfill a commodity requirement or must yield a return on investment. Assigning that metric is the key.

Hi Kevin-- I really enjoyed this hack-- thanks for bringing it to the MIX! I think the perspective you bring is really great here... not just "our people are our greatest assets," but "some of our people are our greatest assets, and some are pretty big liabilities too." The idea of actually figuring out how to quantify this in terms that business success/failure is measured by is the interesting challenge you raise.

I do see some issues with how exactly to quantify a person's value on a real balance sheet without freaking out your CFO and accounting firm in the process. As a bridge or first step, what if perhaps you had a balance sheet for people that was separate from the business balance sheet? You might start there first and see where that takes you… At very least, you might be able to get a sense for whether your people balance sheet is in the red or in the black:)

Once you've tried it and see how well it works, maybe then we can start to figure out whether it is simply a really useful metaphor for measuring the potential value of your people or a accountant-shaking change in the way real business value is measured!